ABCDX segmentation: a guide to product growth and optimization.
Product teams often need help understanding the context behind user behavior metrics: why they behave differently. What underlies loyalty and retention needs to be clarified as to why those who actively use the free version of the product do not pay.
If we have answers to these questions, a business can consciously develop the product and perform tasks that will help sell more to those already paying and encourage those not yet paying to buy.
Which products need help?
Products with a large number of customers. In products where the size of the customer base only allows interaction with some users, it is challenging to analyze people’s behavior. Thisany B2C and B2B SaaS products. Let’s briefly consider the most “edgy” example — freemium B2C/B2B subscription SaaS.
The average Paying Users Ratio in this model is 3–10%. Only 30–100 users out of 1000 bring money to the business. At the same time, not all paying users pay off — this depends on Customer Acquisition Cost, Retention Rate, LTV, and other metrics.
The remaining 900 clients generate 90% of the volume of statistical data and the same large share of calls to technical support and feature requests. In products in the early stages of development, especially those with no systematic work with segmentation of the user base and subsequent interviews, these 900 people drown out the voices of paying customers.
It’s difficult for product managers in a company to ignore the noise from such users who demand that the development team create new features or improve old ones. It’s even harder to discern the right signals in the noise. This way, the backlog becomes full of requests from users who may never start paying.
Products with established analytics. Another paradoxical pattern occurs in almost all companies: with high-quality product analytics and the presence of analysts, the so-called analysis paralysis occurs. Large amounts of data create a false sense of control, and no one has ever asked why users behave the way they do. When the volume of data is large enough, it becomes difficult to discern the context behind the numbers.
Decision debt accumulates when the volume of information becomes difficult to digest and turn into action. The presence of some data provokes you to collect even more before confidently making a decision. “Give me more numbers, do another test, you need to make sure that…” — This is how intuition and resolute decisions can become stagnant.
Products begin to look for ways to justify circumstances and use superficial solutions for show. A typical example is NPS — or other similar methods of collecting opinions about the quality of a product or service. They allow you to understand whether users are satisfied or not, but they ignore the most important thing: in what circumstances and what goals they want to achieve with the help of the product, what is stopping them. It is this context that needs to be understood.
How to solve a problem
To better understand user behavior and, most importantly, the reasons, we recommend conducting ABCDX segmentation and organizing interviews with users.
This method allows the company to focus on the most marginal audience segments, prioritize product development tasks, and, as a result, receive more profit.
ABCDX segmentation is suitable for IT products with good analytics and customer data.
What is ABCDX segmentation?
The segmentation of ABCDX depends on two critical parameters:
- The user’s payment behavior — pays or does not pay — characterizes the actual value for the business;
- The client’s interaction with support — whether he complains and demands or remains silent — determines satisfaction with the product and the impact on the backlog.
We have divided the users into distinct groups based on specific criteria:
Segment A — Ideal clients. They are very interested in the product, buy a lot and with pleasure. They have a short transaction cycle; such users do not burden support.
Segment B — These customers use the product; they have objections or comments and are missing something. They pay regularly, the transaction cycle is short, and the average check is above average.
Segment C — Your product is not very suitable for such users. Their transaction cycle is enormous, and the average check is small. Clients easily fall off, tormenting sales and support.
Segment D — These users are practically not interested in the product, but they take up a lot of sales and support time and do not buy.
Segment X — This is potential segment A. The product in its current form is not suitable for users and requires modifications. Clients in this segment often ask to change something, modify it, or completely customize it to suit their needs.
As practice shows, companies spend only 20% of their time working with features for segments A and B. At the same time, they generate 80% of revenue. Users of segments C and D are forced to work much more on their problems, and their revenue share is only 20%.
Well, If we analyze freemium SaaS products, in the sample for the ABCDX segment only active users should be included. Sampling parameters will differ in different cases. These could be customers with a medium or high Retention Rate and users with a medium or high Product Adoption Rate — people familiar with the product and interacting with its main features and functions.
When analyzing products where there are no free users, segments are broken down as follows:
A — satisfied paying customers with a significant lifespan in the product.
B — the same, but they complain and ask questions. They can take a long time to make purchasing decisions.
C — leads that went deep into the funnel but did not convert or are in doubt. And also those who went to сhurn but did not give a negative assessment.
D — churn and negativity.
How to do segmentation
Analyze the customer base. The main criteria are:
— profitability;
— purchase frequency;
— transaction cycle;
— average check;
— Lifetime и LVT.
Divide customers into four segments in addition to the main parameters. You can add clarifying segments. For example, include paying users in segment A with a lifespan in the product for at least X days/months and exhibiting activity during this period. It is essential to make a large sample — the segment should characterize the behavior of all paying loyal product users and not a dozen fans.
Identify qualifying questions for each segment — they depend on the product but should help to include new users in a certain segment.
In cases with a small sample, segments are combined into AB and CD — paying and non-paying.
Conduct a sample. The sample size of a segment for qualitative research depends on the product’s complexity, the audience’s size, and the team’s capabilities. There is a simple principle — take from six respondents per segment and stop when there is a clear feeling that customers’ responses from the segment are repeating. As a rule, the respondents vary from 5 to 20 people.
To be more precise, to convince you to achieve a specific pattern in reality, you need at least half of all product users to fall under it.
Suppose the product is used in different geographical points, and the behavior of the audience and the economic situation are noticeably different. In that case, it is worth sampling a segment for each region. We advise you to do this if the product works for different audiences.
To attract interview respondents, you can use your channels — support service, email, and instant messengers.
Typically, the respondent receives a reward for participating in an interview — money, a discount on your product, or a certificate for purchasing from an online store, such as Amazon.
Conduct an interview. The research aims to understand the context behind audience behavior and numbers and find differences and overlaps between segments. It is essential to understand the motives and barriers of users when choosing a product: what motivates them and stops them from taking the target action. It is also worth identifying the product’s direct and indirect competitors through your users’ eyes.
During the interview with the respondent, you need to go through the entire path your user went through, from the emergence of a need to the purchase. Along the way, you must ask clarifying questions to get to the point. Therefore, having a single interview guide with questions for everyone and each segment is essential.
To sum up
Based on the results of the work done, the product team will see that there are real people with their motives and fears behind the analytics numbers. You will learn to understand better and feel the target audience that is important to you and focus on their needs. You will understand how and where to attract it and what products you are compared with when choosing a product to fill your needs, that is, with your competitors.
Case with online graphic editor
Situation:
— B2C/B2B freemium SaaS;
— 300–400K Sign Ups/mo;
— Sign Up to Paying User Conversion Rate — 0,9%;
— PU 30 days Churn Rate — 50–70%;
— 50% of churned-paying users are staying active on the free tier.
Problems:
— A freemium product with millions of users has been developing for three years and cannot increase the conversion from registrations to paying users;
— The high outflow of paying people to Free Tire, while many users remain active in the free version;
— Unit Break Even looks unattainable given current trends — LTV / CAC = 0.6;
— Massive load on support;
— The backlog management strategy does not bring any results.
In such a situation, investments in marketing, which are urgently needed in a highly competitive market with a catch-up strategy, look inappropriate.
The team does not understand how to develop the product and fills the backlog with a massive flow of user complaints and feature requests.
Answer. In this situation, it is clear that users receive value from the product in the free version, but more than the value of the paid version is needed to start paying. Or the price of the product, for example, $10 per month, is too high.
We need to determine the reasons for low conversion among paying people and high churn and determine a product development strategy and backlog filling to solve these problems.
The solution lies in two dimensions:
— Set up analytics that will reflect the behavior of paying and non-paying segments and the impact of product releases on key metrics;
— Conduct a qualitative study of the segment of paying users for identification.
Research objectives:
— Segment paying users to determine their needs when using the product;
— Focus on product positioning;
— Find the reasons for the churn of users from the product to reduce this indicator.
What we did:
— Allocated AB segments from the customer base;
— Conducted an email survey to divide users by the types of tasks they solve through the product: freelancer, agency, and others;
— Conducted interviews with each sub-segment of AB customers to understand why they buy the product and what other tasks the product could solve but does not solve now — to fill the product backlog for the future.
The research helped focus product positioning, improve the first session/transaction, and attract new customers like the AB segment.
What’s the result?
ABCDX segmentation is a quick way to get tangible results in product growth and efforts to develop relationships with your audience. This segmentation is also effective for building product marketing: developing positioning, building new meanings, and launching further communications. It allows you to focus communication on current customers and begin to attract new ones better.
About us
Clarity Supply Studio is a team that helps businesses launch and develop products. For this, we use different methods. ABCDX segmentation is just one of them. We create instruments for a specific project after the first workshop with the team, where we identify business problems.
If you want to discuss your task, write to email hey@claritysupply.co or book a call. Let's work!
